3 Lessons from the FTX Collapse

In recent weeks, the crypto world has seen another shocking loss caused by the debacle of FTX, a digital crypto brokerage company that grew to become one of, if not the most important in the field.

FTX was run by a group of very young entrepreneurs and was valued at a staggering $32 billion dollars just months before it filed bankruptcy, leaving many people shocked about its downfall.

So, what lessons can be taken from this, and how can we apply them in the future?

Always Understand What You're Investing In

The cryptocurrency craze, coupled with the creation of many innovative technologies that have made financial markets more accessible than ever before, has brought a plethora of new people to invest their money.

However, without a full understanding of what one is investing in and a clear, reliable investment strategy, this amounts to pure speculation.

Given the way FTX handled its capital and the lack of clear and sustainable sources of revenue, many people have deemed FTX as a Ponzi scheme, perhaps one of the biggest ones in history.

With many world-renowned people promoting it and publicity in scenarios as large as the Super Bowl, many people invested in FTX and its coin without a clear understanding of exactly where their money was going.

Experience and Trust Matter

While the world is surrounded by incredible stories about genius young entrepreneurs who become billionaires before reaching their thirties, these cases are rare exceptions when one looks at statistical data. In reality, most successful entrepreneurs are in their forties.

While the owners and managers of FTX had some experience and studies in finances, they weren’t by any means industry experts, which should tell smart investors that this is an extremely high-risk venture, far from the “easy money” that advertisement seemed to promise.

Regulations Exist for a Reason

There is a lot of debate on whether regulations have positive or negative effects on a market, which are necessary and which aren't. Nonetheless, it is generally agreed that unregulated markets tend to be riskier.

This is the case for a market like crypto, where there is very little in the way of checks and balances to ensure transparency and liquidity for holders of a coin or asset. Although this can mean rapid growth, it can just as easily mean rapid losses.

Final Thoughts

Crypto has had its ups and downs since the invention of Bitcoin, and no matter how bad the crashes seem, blockchain technologies never lose their hype.

It is well known that almost all cryptocurrency values are correlated. Thus, the fall of FTX is bound to affect the markets.

However, it does not mean that crypto will completely lose its attractiveness as an asset class in the long term.